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Understanding Forex by Identifying Market Participants

The high liquidity in the Forex market is the result of the number of market participants who influence price movement. Thus, identifying market participants and their motivations is important to determine the price direction.

Central Banks and Governments

Arguably, these are the most influential participants in the currency markets. In many countries, the central bank represents the government and acts in accordance with its government’s policies and initiatives. However, there are some governments that prefer a more independent central bank. They work in tandem to keep interest rates at a minimum, curbing inflation, and spurring economic growth.

Regardless of the central banks’ degree of independence, governments frequently consult them specifically on matters involving monetary policies. Thus, central banks and governments are usually one as far as monetary policies are concerned.

Commercial Banks and Financial Institutions

Banks make up a big contingent in the Forex markets. Individuals in need of small amounts of foreign currency typically just deal with the market’s fluctuations, however, these transactions add up to form a big chunk of the big ticket transactions happening between banks.

Commercial banks are dominated by larger banks, and in order for those commercial banks to carry on its businesses, they have to have credit relationships between each other. Bigger banks have greater access to more credit and better finance rates which allows it to offer it services to commercial banks on its own. In general, large banks are considered as dealers who buy and sell currencies in accordance with the need to those currencies.

Hedge and Investment Funds

Among the major clients of banks are businesses with international dealings. Whether the business is buying from a foreign client or selling to an overseas supplier, it has to deal with the currency prices’ volatility.

One of the biggest risks businesses face is uncertainty regarding exchange rates. For many multinational companies, managing their Forex risk is a serious issue. To illustrate, a French company places an order for equipment from a manufacturer in Japan. The order requires a 50% payment in Japanese yen prior to delivery which will be after a year to allow for manufacturing. Because of the possibility of wide price fluctuations that can happen in a years’ time, the French company has no way to determine for certain if it will have to shell out more euros when the time for payment comes, therefore, it has to manage its Forex exposure.

Individual Speculators

Speculators are another type of Forex market participants. Instead of exchanging currencies to be used for international dealings or hedging against price movements, they make money from Forex trading by taking advantage of the currencies price fluctuations, and with the introduction of margin trading and technological advancements, now individuals count for a sizable part of financial market participants.

One of the examples on individual speculators the billionaire George Soros who made $1.1B in less than one month on his speculations of the drop in the British pound’s value. On the other side of the fence, derivatives trader Nick Leeson, who caused the collapse of his company by losing $1.4B on speculative futures contract positions.

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About Al Zahir

Al Zahir is a currency analyst and publisher of all technical and general Forex articles on www.mtrading.my

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